Downward Pressure Increases for Gold Stocks Over the Summer

By: Donald_W_Dony

There will be a time when gold and silver stocks shine in performance, but that time is definitely not now. After over 12 months of flat performance, investors will have to endure at lest another 6-8 weeks of weakness.

Investors have had a long wait for gold and silver stocks to perform equally with many of the other commodity-driven sectors. Base metals and energy are both in long-term up trends with brighter future numbers predicted. Gold stock investors have clearly been left out of the party for many months. They have pegged much of their belief of higher prices on the frail and failing fundamentals of the U.S. dollar. Yet, though the currency has declined over the past year, gold stocks have rigidly traded within a horizontal range with no indications of breaking out. Recent technical evidence now suggests that this pattern will stay fixed until at lest early August.

Upward progress for gold in 2007 has slowed considerably. Since January, gold (see Chart 1) has only consolidated lethargically above the key $640 support level and not forged higher. After each frail attempt to move through the key $690 resistance line, gold has drifted back down again to support. And this weak action occurred at the same time that the Greenback plunged from $0.855 to $0.812 (Chart 2).

As the U.S. dollar and gold have a very tight correlation, expectations from investors of higher gold prices on the back of a falling dollar did not develop. Why? Is gold reacting to the U.S. dollar correctly? Chart 2 seems to answer some of those questions.

The American currency has plunged into the $0.80-$0.82 zone five times in the past and each time there has been a sizable upwards rally. As the Greenback is now reaching into this strong supportive band for the 6th time, expectations of renewed strength should occur. And this is exactly what is happening. In the first half of June, the dollar waded down to $0.81 and buying pressure quickly developed. Current technical data now points to stabilization and slightly higher pricing up to the $0.84 level for the dollar over the summer. Though the long-term picture for the dollar presently remains negative, the outlook for the next few months is definitely improving. And the influence on gold and precious metal stocks is the exact opposite; flat to downward pressure is anticipated for the next 6-8 weeks.

Gold and silver stocks (Chart 3), much to the displeasure of many precious metal investors, have remained pinned within a broad trading band for over 18 months. All evidence now indicates a continuation of this pattern. The Philadelphia Gold/Silver Index, which has been traded between 120-150, is anticipated to retest the lower levels later in the summer. The TSX Gold Index (Chart 4) has a similar depressed outlook. Renewed strength with the U.S. dollar suggests that this sector will remain in the bottom level (250-260) of its trading band throughout most of the summer also.

MY CONCLUSIONS: Gold and Silver stocks normally enter summer months with listless performance. This seasonal pattern appears to be developing earlier this year. Technical evidence indicates weakness throughout June and July for precious metal stocks and the expectations of testing lower levels. On a brighter note, this sector typically begins to strengthen in September and a wave of advancing prices develops throughout the 4th quarter. However, with a solid historical support zone now clearly underneath the U.S. currency, the trading action of the dollar throughout the rest of 2007 will likely be the main deciding factor for the direction and extent of any growth in gold stocks.

More information is in the June Technical Speculator newsletter.

Your comments are always welcomed.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2007 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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